Last week, Governor Brown signed two related pieces of legislation (AB 93 and SB 90) which will significantly change California’s Enterprise Zone credits as we know them. While opponents of the legislation may consider this effectively the death of Enterprise Zone credits, it is probably more accurate to consider it a rebirth or re-imagining of California’s economic development incentive programs.
Some may reject this latest development but no one can say the writing was not on the wall. California has been in a well-publicized fiscal crisis, carrying substantial debt over $8B in FUA loan balance alone and facing budget cuts across the board. Governor Brown has been targeting CA Enterprise Zone credits for reform and/or elimination for several years, a decision widely supported by labor groups, partisan and bipartisan experts, and media outlets, to name a few.
At the same time, many California mayors, employers, business organizations, and tax consultants have spoken up in defense of CA Enterprise Zone credits. In the end, after nearly three decades with arguably little to show for the state’s investment in the Enterprise Zone credit program, Governor Brown has opted to take California in a new direction.
Benefits of the New Credit Program
Instead of taking away the Enterprise Zone credit program altogether, AB 93 will overhaul the program and redirect $750 million in business tax breaks. Existing enterprise zones will be retained but hiring credits will be tightened and scaled back. Under the new plan, only employers paying at least 150% of the minimum wage would be eligible for hiring credits, excepting qualified small businesses. Temporary worker agencies, bars, retailers, and restaurants would be excluded.
The Governor has indicated an interest in promoting middle-class job creation over low-wage jobs, and specifically in the industry sectors of manufacturing and biotech research and development, both of which will benefit from a sales tax exemption. According to data from the Los Angeles Times, the single largest industry sector benefiting from Enterprise Zone credits in 2010 was retail/wholesale trade. Other significant beneficiaries were durable and non-durable goods, financial, and information industries. So, many employers who have benefited from the CA Enterprise Zone credits in the past will not be able continue doing so, retailers in particular.
A Key Aspect of Changes to CA Enterprise Zone Credits
Fittingly, supporters of the Governor’s new economic development plan includes many biotech firms. In the Governor’s press release, BIOCOM President and CEO Joe Panetta is quoted saying, “The Governor’s economic package signed into law today will be invaluable to enabling small and mid-size California life science companies to be more competitive in the global market.” The bill itself was signed by Governor Brown in San Diego while visiting Japanese-owned biotech firm Takeda.
Overview of the Newly-Signed Legislation
Dubbed “New Tools for a New Economy,” the new legislation redesigns California’s Enterprise Zone credit program, ends the New Jobs Credit tax incentive program, and replaces it with a multi-pronged credit package consisting of:
NEW Sales Tax Exemption
From July 2014 through July 2022 there is a statewide sales tax exemption on manufacturing and research & development (R&D) equipment purchased by a qualified person engaged in manufacturing or biotechnology R&D. The equipment could not be removed from the state within one year from the date of purchase and must be used in a manner consistent with the exemption qualifications. The first $200 million in annual equipment purchases could potentially be excluded from California’s share of the sales tax (approximately 4.19%).
Eligible employers include manufacturers with NAICS codes 3111 to 3399, and certain Biotech and Physical/Engineering/Life Sciences companies with NAICS codes 541711 and 521712. Certain financial institutions, agricultural, and extractive taxpayers are ineligible.
NEW Investment Incentive
Effective January 2014, a new fund will be created to make available the new California Competes Credit, administered by the Governor’s Office of Business and Economic Development. For 2013-2014, there will be $30 million; for 2014-2015, there will be $150 million; and for each year through 2017-2018, there will be $200 million through the fund.
Incentive decisions for this fund will be made by a five-member committee and businesses will be considered on the basis of number of jobs retained and/or created, the extent of poverty in the business development area, a minimum compensation limitation, and a set retention period. 25% of the credits are earmarked for small businesses, and awarded credits may be clawed back if a business fails to honor the terms and conditions of its contract.
Revised Hiring Credits
From January 2014 through January 2021, the revised Enterprise Zone credit program could be taken against corporate income and personal income taxes. Available to qualified businesses located in census tracts with the 25% highest share of both unemployment and poverty in the state, this would reinstate expired Enterprise Zones Palmdale and Watsonville in addition to retaining the current 40 zones in effect. The credit could be taken for hiring long-term unemployed, veterans separated from the armed forces within 12 months preceding hire date, ex-offenders previously convicted of a felony, recipients of CALWORKS, and also people receiving the Federal Earned Income Tax Credit. Additionally, it could only be taken by employers with a net increase in jobs. 25% of the funds are earmarked for small businesses. The credit will generally be equal to 35% of the wages between 1.5 and 3.5 times the minimum wage for a period of five years. Note that temporary worker agencies, bars, retailers, and restaurants are excluded from taking the credit.Use this detailed guide on Work Opportunity Tax Credit to find out how you can take advantage of this lucrative tax incentive and maximize your savings while helping members of disadvantaged groups.
Quick Look at the New CA Enterprise Zone Hiring Credits
Quick Look at the New CA Enterprise Zone Hiring Credits
“Old” CA Enterprise Zone Credits (through 12/31/13)
“New” CA Enterprise Zone Credits (starting 1/1/14)
Retailers can take the credit
Food service employers can take the credit
Temporary employment agencies can take the credit
Casinos can take the credit
Bars can take the credit
Sexually-oriented businesses can take the credit
Can be used for hiring long-term unemployed (6 mos.)
Can be used for hiring unemployed veterans
Can be used for hiring ex-felons
Can be used for hiring recipients of the Federal Earned Income Tax Credit
No (different requirements to demonstrate economic need)
Can be used for hiring CalWORKS participants
No (but CalWORKS participants may have been eligible under other criteria)
Hiring credits for any other categories (aside from economic development areas)
Yes (16 categories)
Hiring credits apply in these economic development areas
42 Enterprise Zones, plus a Targeted Tax Area (TTA), seven LAMBRAs, and two Manufacturing Enhancement Areas (MEAs)
42 Enterprise Zones as defined for 2011, including Watsonville and Antelope Valley, excluding any census tract in the lowest quartile of unemployment and poverty, plus census tracts with highest 25% unemployment and high poverty rates in the state, two MEAs, one TTA, and up to eight “LAMBRA” regions.**
Can be claimed retroactively by amended tax return
How many days from start of employment must credit be requested?
When employer files taxes
50 days from start of employment
Savings potential per hire
Up to $37,440 over 5 years
Up to $56,000 over 5 years
Requires new jobs (not just new hires)
New hire salary requirements
Minimum wage (no incentive for higher wages)
1.5x the minimum wage (credit increases up to 3.5x minimum wage)
Minimum length of employment
1 year or subject to recapture
Yes; 3 years or credit must be returned
* Small businesses defined as having gross receipts of less than $2 million at owner level are generally exempt from excluded business categories.
** Local Agency Military Base Realignment Areas; limited to one LAMBRA per geographical region of the state.
What Should Employers Do Now
CA Enterprise Zone is still in effect through the end of 2013. Taxpayers are also still able to take Enterprise Zone credit for employees hired before 1/1/14 who are in their first 60 months of employment. Residual carry-over credit from existing CA Enterprise Zone credits earned through the end of 2013 will expire after 10 years.
The legislative changes mean many employers who have taken CA Enterprise Zone credits in the past may now be locked out. However, many employers who have not yet taken advantage of the program may be surprised to learn how much they can benefit. Some employers will ultimately reap greater financial rewards from the newly revised credit program, but in order to benefit, employers must be proactive and plan ahead.
Many criticized the old Enterprise Zone credits program for disproportionately benefiting larger employers, and for being claimed by many employers retroactively. Both are outcomes of the burden of paperwork required to claim the credits timely and follow through with them until they are secured. Smaller employers in particular often lack the resources to go after these credits, being mired down by day-to-day administration and compliance issues.
To even the playing field for employers of all sizes, it would have been nice to see a lightening of the requisite paperwork, but it appears that the revised Enterprise Zone credits program maintains significant documentation requirements which will prove still burdensome for some employers, in addition to imposing a deadline for claiming the credit within 50 days of the new hire’s start of employment. Investing in a technology solution that can easily identify and document potentially qualifying employees in a timely manner may help employers maximize their benefit from CA Enterprise Zone and similar hiring credit programs.
On June 22nd, the Los Angeles Times ran a piece on proposed ballot measure that would have asked California voters in November 2014 to eliminate the Enterprise Zones. Proposed by John Burton, a Democrat, as noted in the Times, the move appears intended to bolster an effort by Gov. Jerry Brown to eliminate enterprise zones and replace them with a new economic tool. Since that is now been accomplished with SB 90 and AB 93, it is safe to assume this measure is moot.
Enterprise Zone Program Wind-Down
Even though it was designed as a broad-based stimulus for increased hiring, capital spending, and general business expansion in economically challenged geographic regions, California’s Enterprise Zone credits have been repealed by legislation. The authority no longer exists to issue hiring tax credit vouchers under this program.
Even though this tax incentive no longer exists, there are other lucrative opportunities. The Work Opportunity Tax Credit (WOTC) is a Federal income tax credit applied against a company’s income tax liability. It brings the financial benefits of up to $9,000 for every qualified new hire, depending on the industry. The program is usually described as a win-win situation for employers as well as for employees due to its numerous benefits. What makes it even more attractive are electronic solutions that make the WOTC administration simple and straightforward, leaving employers with increased profitability and cash flow.
Editor’s Note: This post has been updated for accuracy and comprehensiveness.Disclaimer: This article is general in nature and is not intended to replace the guidance of an employment tax expert and/or legal professional with regards to an appropriate course of action in your particular circumstances. Please consult with a professional for appropriate advice in your case. Pursuant to IRS “Circular 230” rules, any information included herewithin is not intended or written to be used for the purpose of avoiding penalties under the federal Internal Revenue Code.